I believe it is fair to say that 2016 was a bit unusual. Thinking about the terminology many of us learned last year leads us to that conclusion: snowflake, alt right, safe spaces, and so on.
While peace was finally achieved in the Western Hemisphere (Colombia), it is escalating in the Middle East and Eastern Europe. Religious violence is making its presence known in the streets of France and Germany. We are losing our confidence in the accuracy of main stream media.
And, Donald Trump was elected President.
Our industry moves at a glacial space. Thus, writing annual summaries is a fruitless exercise in an industry that takes over 10 years to develop a product.
Regardless, the calendar provides us with a convenient framework to look at recent history, and to project what key drivers may shape our industry in 2017 and beyond.
Oncology Leads The Way
To no one’s surprise, Preclinical Oncology continued to garner the largest number of deals in 2016, relative to other therapeutic areas and stages of development. Of the 282 Announced/ Completed Deals in Oncology, (M&A, VC, Partnerships, etc), over a third were for Preclinical assets, or involving companies with Preclinical assets.
However, oncology is the exception, as many other therapeutic categories experience far lower deal volume, and deals tend to occur with later-stage assets or companies. For example, over 55% of deals in the Cardiovascular space involved assets already on the market.
Yet, there are pockets in which early-stage deals are being done, such as ophthalmology. While a third of ophthalmology deals involved commercial products, another third involved Preclinical assets.
Meanwhile, the NASDAQ Biotechnology Index ended the year at 2,772, down from a January, 2016 opening of 3,459. The media blamed a lack of approvals for this decline, yet 2015 was a record year for approvals. Approvals for 2016 will be lower than 2015, but a bumper crop of approvals are anticipated for 2017.
Are these trends which will continue in 2017? Be our guest…
Innovation
Big Pharma is regularly criticized for a lack of efficiency, especially by those who forget (or who never learned) that scientific discovery in biological systems is damned hard. However, this is changing, as the increasing use of biomarkers and other techniques will continue to improve productivity.
However, there is no question that external sourcing of innovation will continue. Companies with novel assets in therapeutic areas indications of interest to Big Pharma will get the attention of the scouts, provided the data packages are in keeping with what potential partners want.
This is a point which seems to escape many small company executives.
Prospective licensing partners are the customers of small life science companies seeking partnerships. The job of the prospective licensor is to raise enough capital to advance a technology to the point where it is ready to be presented (and “sold”) to a licensee.
It does not matter how interesting a particular asset may be. If it is not of interest to the main stream industry, then it will be extremely difficult to find a conventional licensing partner.
This does not meant the opportunity is non-existent. But what it does mean is that a different approach may be needed, i.e., raising additional capital (by convincing venture capitalists) to advance an asset to the point where it will be attractive to the multinationals. Novel financing methods will become increasingly common and important.
What does this mean for 2017? We believe that Big Pharma will be increasingly selective about the assets they in-license. The hurdles will continue to be very high, since assets are competing against each other and internal programs.
This suggests that deal terms will continue to be large and lucrative for companies with the right assets at the right stage of development. And once the best of the best assets are licensed, there will continue to be little room for fast followers.
Investors who drag their feet haggling over relatively minor due diligence issues may find themselves losing out to faster, more flexible investors and portfolio companies.
Pricing
The only time a product like EpiPen makes it into the mainstream media is when a pricing scandal erupts. However, we will all eventually forget the unpronounceable names of CEOs who choose to grow shareholder value through drug price arbitrage instead of innovation. So this will pass.
What the incoming administration will do with the Affordable Care Act is anyone’s guess. But with gridlock a regular occurence in Washington, it is likely that the individual states will take greater control over drug pricing, to the extent that they can.
We are pleased to see positive movement in the development and commercialization of biosimilars. While we do no think biosimilars will result in tremendous price savings to payers, every little bit helps.
China
And what do we make of China?
We have no data to support this statement. But anecdotally, it appears that more and more Chinese companies and investors are attending conferences in the US and Europe. Indeed, China-specific conferences are popping up on the East and West Coast, including one next week. These groups are looking for both assets and investment opportunities.
Chinese CDMOs and CROs also appear to be making a greater push into the US and Europe.
Statistics on licensing and other transactions by Chinese companies is difficult to acquire and assess. MedTrack, for example, shows deal volumes in 2014, 2015, and 2016 of 0, 3, and 4. Do we really believe that there were only 7 transactions by Chinese companies over a three-year period? No, of course not.
Unmet needs in China continue to resemble those of “Western” markets, where the prevalence of diabetes and cardiovascular diseases (and their sequelae) are growing at alarming rates.
Yet, we should remember that the Chinese pharmaceutical market is heavily genericized, and heavily price controlled. Price cuts on branded drugs of 5-20% per re-pricing cycle are not uncommon, especially for drugs which are imported from abroad.
Recent news articles (if they are even true) about widespread fraud in the clinical trial industry in China are hard to believe, and we have no basis to comment on their veracity. With India continuing to have issues on the manufacturing front, will Chinese companies pick up the slack?
However, it stands to reason that cultural, language, and other differences strongly suggest the need for local assistance when seeking investment or partnerships in China.
For a broader discussion of China and the trends shaping this important economic power, we refer you to recent articles by Deloitte and McKinsey.
Politics
The recent election of Donald Trump as the next President of the US has brought with it an unprecedented number of uncertainties. His initial statements lead us to think that the administration will be pro-science and pro-innovation, as these are ultimately pro-business policies.
But were these statements made to gain votes? Or, are these the actually philosophies which will underly policy?
Who knows.
The current international climate is not assuaging our concerns. Religious violence in Western Europe and the Middle East continues to be a huge problem with no clear resolution, especially when politicians fail to publicly acknowledge and discuss the true cause of the problem. And what will we do about Russia?
How this will impact our industry is anyone’s guess, at this point.
What Keeps Us Up at Night?
Antibiotics – We need new ones quickly. Yet industry dynamics do not favor the development and commercialization of novel antibiotics.
Tech Transfer – We know what the industry is looking for, yet our universities still struggle to deliver technologies of interest to pharma.
Unmet Needs – It remains worrisome when unmet clinical needs are not served well by our industry. Pain, CNS, Metabolics…the list seems endless. While the opportunity may appear large in some of these areas, the reality is that a lack of industry and/or investor interest (whether rationale or not) means the unmet needs will persist.
Let’s hope the trends towards increasing availability of medical marijuana helps many of these patients.
January, 2018
This time next year, we will be celebrating a great year for FDA approvals. We will be scrambling to find the illusive inexpensive hotels in San Francisco for the January, 2019 conferences (else staying at our local catamaran). And, we will be a year into a Trump presidency.
It is anyone’s guess what we will be talking about in San Francisco next year, aside from exorbitant hotel prices.
Perhaps this is our ultimate conclusion at this point….that 2017 will be a year of uncertainty. And, this uncertainty will come from the political and social environment which surrounds us.
Our industry fundamentals will remain stong, but increasingly challenging for companies with assets and products on the fringes of Big Pharma interest. All of us will need to be increasingly creative in order to bring some of these assets and technologies forward.
Next Week
Next week will be the annual industry kickoff in San Francisco. We will be at the Biotech Showcase, and assorted meetings around Union Square. You can follow the action on Twitter (#BiotechShowcase, #JPM17).